Green University of Bangladesh (GUB)

AssignmentOn

Managerial Accounting – (ACC – 305)

Topic: Framework of Environmental Management Accounting: An Overview.

Semester: Summer – 2013

Prepared by: “YOUTH BOOMERS”

Name ID. Signature

Md. Moazzem Hossain 110106034

Md. Anqur Chowdhury 110106027

Md. Shahidul Islam 110106050

Ms. Nowrin Chowdhury 110106058

Prepared for: Md. Kamruzzaman

Lecturer in Accounting,

Department of Business Administration (DBA),

Green University of Bangladesh (GUB),

Dhaka, Bangladesh

Date: 22nd June 2013

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Letter of Transmittal

June 22, 2013

Md. Kamruzzaman

Lecturer in Accounting

Department of Business Administration (DBA)

Green University of Bangladesh (GUB)

Subject: Submission of an assignment.

Dear Sir

We gladly present to you our assignment titled “Framework of Environmental Management Accounting: An Overview.” We have made the assignment as you give us to do by help of your article and internet.

We believe the knowledge and experience we gathered during the assignment will be extremely helpful in our future professional life. We will be grateful to you if you accept the assignment.

Your support in this regard will be highly appreciated.Thanking you.

___________________Md. Moazzem HossainID. 110106034

___________________Md. Shahidul IslamID. 110106050

___________________Md. Anqur ChowdhuryID. 110106027

___________________Ms. Nowrin ChowdhuryID. 110106058

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Table of contents

Serial No. Topic Page No.

1) INTRODUCTION

Objectives of the Study Research Methodology

4

2) CONCEPT OF ENVIRONMENTAL MANAGEMENT

ACCOUNTING (EMA)

Why Care about Environmental Issues? Uses and Benefits of EMA

5, 6 & 7

3) APPROACHES OF ENVIRONMENTAL MANAGEMENT

ACCOUNTING FRAMEWORK

8

4) ENVIRONMENTAL MANAGEMENT ACCOUNTING

FRAMEWORK

8

5) TECHNIQUES OF ENVIRONMENTAL MANAGEMENT

ACCOUNTING

Input/output analysis Process flow charts Environmental Activity-Based Accounting

9, 10 & 11

6) LIFE CYCLE COSTING

Environmental Management as part of Total Quality Management

12

7) CONCLUSION 13

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1. INTRODUCTION

The greatest concern these days have been on the effect of environment that these companies

are putting to earn higher revenues and increasing their bottom line. Thus, government, non-

governmental organizations as well as the general public are increasingly putting pressure on

the companies to become responsible towards the environment and invest substantial amount

of money and effort to protect the environment.

Objectives of the Study

The central theme of this paper is to illustrate the benefits of environmental management

accounting system and find out how businesses can implement this system to garner

better market value and position. Some of the major benefits of the environmental

management accounting include aiding companies to take responsible decisions relating

to issues such as allocating costs, capital budgeting or designing processes.

Furthermore, companies need to find out the environmental costs from the account sheets

which are often hidden under the overhead accounts, direct labor accounts or direct

material accounts. It has been found that in most cases, environmental costs are hidden in

different parts of the management accounting system.

Research Methodology

I propose to use qualitative research methodology for undertaking this thesis, as I believe

that qualitative research is significant for analyzing the concept of environmental

management accounting and how handling of environmental issues inappropriately can

damage the reputation of a business in the market. Furthermore, it is also imperative to

conduct an in-depth secondary research to understand the surrounding world.

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2. CONCEPT OF ENVIRONMENTAL MANAGEMENT ACCOUNTING (EMA)

According to IFAC’s Statement Management Accounting Concepts, EMA is “the

management of environmental and economic performance through the development and

implementation of appropriate environment-related accounting systems and practices. While

this may include reporting and auditing in some companies, environmental management

accounting typically involves life-cycle costing, full-cost accounting, benefits assessment,

and strategic planning for environmental management.”

A complementary definition is given by the United Nations Expert Working Group on EMA,

which more distinctively highlights both the physical and monetary sides of EMA. This

definition was developed by international consensus of the group members, representing 30+

nations. According to the UN group: EMA is broadly defined to be the identification,

collection, analysis and use of two types of information for internal decision making:

Physical information on the use, flows and destinies of energy, water and materials

(including wastes) and

Monetary information on environment-related costs, earnings and savings.

It makes sense that different countries and organizations would adapt general EMA concepts,

language and practices to suit their own goals. A certain amount of experimentation and

variation is also to be expected because EMA is still a relatively young and emerging field in

comparison to conventional management accounting. The great number of existing guidance

documents has, however, contributed to confusion on the exact definition, benefits and

applications of EMA and on available EMA approaches and tools. This has been exacerbated

by the fact that EMA information is broadly useful for so many different types of

management decisions and activities, as well as for external reporting. With all this in mind,

the Board of Directors of the International Federation of Accountants (IFAC) decided to

commission this guidance document on EMA to bring together some of the best existing

information on EMA and to update it.

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Why Care about Environmental Issues?

Why should organizations (or accountants) care about environmental issues? First, many

internal and external stakeholders are showing increasing interest in the environmental

performance of organizations, particularly private sector companies.6 An example of

internal stakeholders might be employees affected by pollution in the work environment.

External stakeholders include communities affected by local pollution, environmental

activist groups, government regulators, shareholders, investors, customers, suppliers and

others. The types and intensities of environmental pressures can vary widely from

country to country and among different business sectors. It is safe to say, however, that

environmental pressure is forcing many organizations to look for new, creative and cost-

efficient ways to manage and minimize environmental impacts. Prominent examples of

environmental pressure relevant at the international level include:

Regulatory control pressures, for example, the RoHS Directive, a European Union

(EU) regulation that restricts the use of certain hazardous substances in electrical and

electronic equipment sold.

Environmental tax pressures, for example, various government-imposed

environments related taxes such as carbon taxes, energy use taxes, landfill fees and

other emissions fees.

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Uses and Benefits of EMA

The specific uses and benefits of EMA are numerous, but can be organized into three

broad categories, as illustrated below. The emphasis on Eco-efficiency and Strategic

Position in two of the categories parallel the overall evolution of management accounting

to include not only information provision and management planning and control, but also

a focus on effective resource use and value creation. The strategic focus of EMA can,

however, vary widely among different organizations.

It should be noted that there are no strict dividing lines among these three categories. For

example, a manufacturing firm that reduces water use and, thus, wastewater generation

via eco-efficiency projects might also reduce the load to, and costs of, an in-house

wastewater treatment plant installed primarily for compliance purposes costs that may

best be handled by scenario analysis. This paper provides examples of the use of EMA

perspectives for appraising investment projects related to eco-efficiency improvements in

a manufacturing process, new product development and reduction of long-term

environmental liability.

EMA approaches and information can be used not only to help assess particular

investment projects, but also to help assess the environmental and related cost

implications of particular types of materials and products. The assessment of a particular

product line is often referred to as Life-cycle Assessment (LCA) or Life-cycle Costing

(LCC). Aggregation of EMA-type (and other) information from an organization’s

suppliers and customers can also be used to contribute to better Supply Chain

Environmental Management (SCEM).

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3. APPROACHES OF ENVIRONMENTAL MANAGEMENT ACCOUNTING

FRAMEWORK

This section outlines the two mainstream environmental management accounting

frameworks:

EMA limited to internal environmental accounting based on monetary measures

EMA as a general term for internal environmental accounting

4. ENVIRONMENTAL MANAGEMENT ACCOUNTING FRAMEWORK

EMA is the generation and analysis of both financial and non-financial information in order

to support internal environmental management processes. The major areas for the application

for EMA are:

Product pricing

Budgeting

Investment appraisal

Calculating costs and

Savings of environmental projects, or setting quantified performance targets.

EMA is as wide-ranging in its scope, techniques and focus as normal management

accounting. Burritt et al (2001) stated: 'there is still no precision in the terminology

associated with EMA'.. Burritt et al developed a multi-dimensional framework of EMA.

Their framework considers the distinctions between five dimensions:

Internal versus external.

Physical versus monetary classifications

Past and future timeframes

Short and long terms and

ad hoc versus routine information gathering in the proposed framework for the

application of EMA

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5. TECHNIQUES OF ENVIRONMENTAL MANAGEMENT

ACCOUNTING

The main difficulty associated with environmental costs is their identification and allocation.

According to UNDSD (2003), conventional accounting systems tend to attribute many of the

environmental costs to general overhead accounts with the result that they are 'hidden' from

management. Thus, management is often unaware of the extent of environmental costs and

cannot identify opportunities for cost savings. EMA attempts to make all relevant, significant

costs visible so that they can be considered when making business decisions (Jasch, 2003).

UNDSD (2003) identified management accounting techniques which are useful for the

identification and allocation of environmental costs as: input/output analysis, flow cost

accounting, activity-based costing (ABC), and lifecycle costing.

Input/output analysis

The input/output analysis is a technique that can provide useful environmental

information, sometimes referred to as mass balance.

This technique records material flows with the idea that 'what comes in must go out - or

be stored' (Jasch, 2003). As shown in Figure-5, the purchased input is regarded as 100%

and is balanced against the outputs - which are the produced, sold and stored goods and

the residual (regarded as waste). Materials are measured in physical units and include

energy and water. At the end of the process, the material flows can be expressed in

monetary units. Process flow charts can help to trace inputs and outputs, in particular

waste.

Flow management involves not only material flows, but also the organizational structure.

Classic material flows are recorded as well as material losses incurred at various stages of

production. Flow cost accounting makes material flows transparent by using various data,

which are quantities (physical data), costs (monetary data) and values (quantities x costs).

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Process flow charts

The next step after environmental cost assessment and material flow balances on a

corporate level is to allocate the data from the system boundary of the company fence to

internal processes. Process flow charts, which trace the inputs and outputs of material

flows (solid, liquid and volatile) on a technical process level, give insights into company-

specific processes and allow the determination of losses, leakages and waste streams at

the originating source. This requires a detailed examination of individual steps in

production - again in the form of an input output analysis, but sometimes linked to

technical Sankey diagrams. The process flow charts combine technical information with

cost-accounting data. Experience has shown that such a consistency check provides great

optimization potentials, and has thus become a major tool in environmental accounting.

Therefore it is desirable for the technical and financial bookkeeping to be conducted in a

compatible way.

Environmental Activity-Based Accounting

Activity-based costing (ABC) '...represents a method of managerial cost accounting that

allocates all internal costs to the cost centers and cost drivers on the basis of the activities

that caused the costs,' (UNDSD, 2003). ABC applied to environmental costs

distinguishes between environment-related costs and environment-driven costs. The

former are attributed to joint environmental cost centers, for example incinerators or

sewage plants.Schaltegger and Muller (1998) stated 'the choice of an adequate allocation

key is crucial for obtaining correct information'. The four main allocation keys are:

Volume of emissions or waste

Toxicity of emission and waste treated

Environmental impact added (volume x input per unit of volume) volume of the

emissions treated and

The relative costs of treating different kinds of emissions.

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Internal environmental costs are often treated as overhead costs and divided equally

between all cost drivers. A common example is that the costs of treating toxic waste of a

product are included in the general overhead costs, and the overhead is allocated in equal

parts to all products. However, “dirty” products cause more emissions and require more

clean-up facilities than “clean” products. Equal allocation of those costs therefore

subsidizes environmentally more harmful products. The clean products, on the other

hand, are “penalized” by this allocation rule as they bear costs that they did not cause.

Many terms are used to describe this correct allocation procedure, such as

environmentally enlightened cost accounting, full cost accounting or activity-based

costing (ABC). ABC, activity-based costing, “is a product costing system, ... that

allocates costs typically allocated to overhead in proportion to the activities associated

with a product or product family” . ABC represents a method of managerial cost

accounting that allocates all internal costs to the cost centers and cost drivers on the basis

of the activities that caused the costs. The activity based costs of each product are

calculated by adding the appropriate share of joint fixed and the joint variable costs to the

direct costs of production. The strength of ABC is that it enhances the understanding of

the business processes associated with each product. It reveals where value is added and

where value is destroyed.

The environmental impact is calculated by multiplying the volume of waste by the

toxicity of the emissions. However, this allocation key, too, is often inappropriate, as the

costs of treatment do not always relate to the environmental impact added. Thus the

choice of allocation key must be adapted to the specific situation, and the costs caused by

the different kinds of waste and emissions treated should be assessed directly.

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6. LIFE CYCLE COSTING

Environmental Management as part of Total Quality Management

The pursuit of environmental quality management via the development of an

Environmental Management System (EMS) can only be achieved if 'environmental audit'

is a concomitant feature of such a system. It is arguable that the two are inextricably

linked insofar as good environmental management is increasingly recognized as an

essential component of TQM. In common with TQM, the focus is upon 'continuous

improvement' and the pursuit of excellence. Such organizations pursue objectives that

may include zero complaints, zero spills, zero pollution, zero waste and zero accidents.

Information systems need to be able to support such environmental objectives via the

provision of feedback - on the success or otherwise - of the organizational efforts in

achieving such objectives.

This approach to environmental quality management requires the development of

environmental performance measures and indicators that will enable a comprehensive

review of environmental performance to be undertaken. Many - if not all - total quality

management accounting techniques can be modified and effectively adopted to help

manage environmental issues.

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7. CONCLUSION

It can be said that most companies do not know about the extent of their environmental costs

and tend to underestimate them. This leads to distorted calculations of improvement options.

For example, Amoco Yorktown Refinery estimated their environmental costs at 3% of non-

crude operational costs. Actually they comprised 22% of non-crude operating costs as the

case study of Ditz et al (1998) revealed. However, the study also discovered a large

proportion of environmental costs were caused by other processes that had not been

identified by Amoco.

EMA can solve these problems. The above-mentioned accounting techniques are useful for

EMA to identify and allocate environmental costs. In addition, there are alternative

techniques to estimate environmental costs such as the 'environmental cost decision tree' as

described by Rimer (2000). The most significant problem of EMA lies in the absence of a

clear definition of environmental costs. This means it is likely that organizations are not

monitoring and reporting such costs. The increase in environmental costs is likely to

continue, which will result in the increased information needs of managers and provide the

stimulus for the agreement of a clear definition. If a generally applicable meaning of

environmental costs is established, the use of EMA will probably increase with positive

effects for both organizations and the environment in which they operate. In the future it will

not only be large companies which can afford to implement EMA but also small and

medium-sized enterprises which have fewer available financial resources.

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